What Does Corruption in Your China QC Inspection Process Look Like?

Transparency International’s latest Corruption Perception Index places most countries in the Asia Pacific region in the bottom half of their world ranking. And given the prevalence of contract manufacturing in countries like China, India, and Vietnam — all of which scored 40 or less out of a possible 100 points — these results continue to give importers cause for concern.
 
If you’re like most importers, your supply chain probably contains tens, if not hundreds, of different suppliers, though you may have only directly contacted a few. And even if you’re careful to conduct quality control inspection at various stages of production, you may still be vulnerable to corruption and its consequences.
 
In fact, high integrity is one of the traits importers most often seek in a quality control (QC) inspector, whether hiring their own staff or an independent inspection firm. But even despite your best efforts at due diligence, corruption can still impact your inspections. Results can vary from receiving defective or otherwise unsellable goods, to losing valued customers and distribution channels when retailers refuse to stock your products.
 
We will look at actionable steps you can take to prevent corruption in the inspection process in Part 2 of this article. But let’s first discover how corruption typically appears and some specific problems you are likely to face when it permeates in your QC team.
 
What does corruption in your QC inspection process look like?
When you hear the word “corruption” you probably think of an overt exchange of money for some favor or special treatment. China’s custom of exchanging red envelopes filled with money, or hóngbāo, is a well-known example, though similar ones exist in other East Asian countries. But like many importers, you may not realize that corruption, as seen in the QC industry today, more often takes much subtler forms, including:
 

• Transportation– factory management or staff may offer to drive your inspector to or from the inspection site.
• Meals– suppliers may offer to provide free lunch to your inspector, whether on-site or at a nearby restaurant.
• Gifts– suppliers may offer your inspector a gift, often cigarettes, tea, or a bottle of wine in China, for example.
• Accommodation– inspectors are often based locally near the factory or inspection site. But other times they may need to travel to a remote location and find lodging for the night. Factory managers may offer to pay for or otherwise provide accommodation.
• Entertainment– it is very common for suppliers in East Asia to treat their customers to an evening out to dinner or a local bar or karaoke (KTV in China). They may extend a similar invitation to your inspector.

 
Seemingly innocent gestures like these, which you might never have expected would be a problem, could influence your inspector’s judgement. And the more time an inspector spends at a particular factory dealing with the same factory workers, the more likely they are to develop a friendly relationship that can interfere with honest inspecting and reporting.
 
Extortion on the part of inspectors
While most importers are likely to assume corrupt suppliers are the only integrity threat in the QC industry, extortion on the part of outside inspectors has become a growing concern in recent years. Extortion typically occurs when inspectors demand some compensation, or “kickback”, from suppliers in exchange for favorable reports of product quality. The goods produced at a factory may meet your requirements, but an unscrupulous inspector may threaten to submit a report to the contrary, unless your supplier gives them some kind of reward.
 
When extortion occurs inspectors are more likely to report quality issues that are difficult to confirm with photos or conclusive data in their report. For example, inspectors often confirm resin coating on a fabric by hand feel alone—there’s usually little else they can do to test this on-site. This makes it easy for an inspector to lie about the result in their report. And importers are more likely to trust their inspector’s word over their supplier’s.
 
Similar examples can occur when comparing a golden sample against mass production to visually check for discrepancies in appearance. It’s relatively easy for an inspector to claim the two don’t match. Like most importers, you may rely on photos in the report to tell the difference. But characteristics like matte/glossy finish or color can be difficult to judge by photos alone.
 
As more importers have become alert of the risk of suppliers corrupting their inspection staff, extortion has become a more frequent practice. Nevertheless, both corruption and extortion have the potential to do irreparable damage to your brand and supply chain.
 
 
What consequences might you face when your inspector’s integrity is compromised?
Perhaps the most obvious and immediate result of integrity issues during the product inspection process is that you will receive an inaccurate report. Integrity issues can affect reporting in several ways, including:
 

• Falsely reporting product condition or quality – inspectors might plainly misrepresent their findings of the product in the report they issue you. For example, they might underreport the number of defective units found in the sample. Or they might report that your product passed a particular on-site test when it actually failed, or they didn’t perform the testing.
• Under-inspecting– most inspections use acceptance sampling, typically following AQL standards, which dictates a specific sample size, the number of pieces from production QC staff pull randomly for inspection. Often you will have agreed with your inspector ahead of time on this sample size (e.g. 125 pieces). Your inspector may check fewer pieces than this quantity, while reporting that they checked the full sample size.
• Overstating the quantity of finished goods – production and shipping delays are common worries among importers. Inspectors may falsely report that production is on schedule by overstating the number of finished goods they find at the factory.
• Hiding the factory information – your supplier may not want you to know the true location of their factory, the conditions at that factory or that they are using sub-suppliers.

 
The main concern with receiving an inaccurate inspection report is that you will likely make decisions about your goods based on false information. This can result in a number of serious consequences.
 
Shipping defective or substandard goods
False or inaccurate reporting often leads importers to approve an order for shipping only to find unacceptable quality issues in the finished goods they receive. Whether you find a high number of defects or products that don’t conform to your specifications, these issues can have a major impact on your bottom line.
 
You may need to pay for costly product rework or other corrective actions that factory staff could easily have performed prior to shipping. Worse yet, you may be forced to discard unsellable goods or send goods to customers that don’t meet their expectations. Ultimately, you could face extra costs in the form of waste and product returns.
 
Missing shipping deadlines
Another consequence of receiving an inaccurate report is delays. Misinformation can lead to confusion and delays as you try to determine when your shipment will be ready to leave the factory. These delays often affect your customers, as you may be unable to meet commitments you’ve made to deliver the goods to them by a certain date.
 
Violating labor laws or social compliance standards
You may already be familiar with the implications of corruption and extortion in the auditing industry. Factory managers facing an audit to check adherence to brand or retailer compliance standards might attempt to hide violations by bribing the auditor. A similar situation can occur during QC inspection. Factory staff may bribe an inspector to keep them from reporting any glaring labor violations they may have witnessed during inspection.
 
Your distributors may choose to cut ties with you if they discover labor violations at your supplier’s facility. Negative publicity surrounding labor violations can damage you brand’s reputation, as shown with Ivanka Trump’s brand, which made recent headlines. A safety violation could even result in an industrial disaster like the Rana Plaza collapse in 2013, which resulted in about 1,130 deaths.
This is Part 1 of a two-part article about QC inspections in China. In Part 2, we discuss steps to prevent corruption in your QC inspection process.
 
This article was first published on China Briefing.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond.

For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.